Salience and mutual fund investor demand for idiosyncratic volatility

Christopher P. Clifford, Jon A. Fulkerson, Russell Jame, Bradford D. Jordan

Research output: Contribution to journalArticlepeer-review

3 Scopus citations

Abstract

We find that mutual fund investors are more likely to both purchase and redeem funds with high idiosyncratic volatility (IV). Investors' tendency to purchase high IV funds is largely driven by high IV funds having more extreme returns, which increases the salience of the fund. Including flexible controls for extreme past returns over multiple horizons decreases the effect of IV on new investment, and experimental evidence corroborates that increasing the salience of extreme returns increases investor demand for IV. Demand for IV is higher among retail investors and funds with otherwise lower salience. Collectively, the evidence suggests that extreme returns attract investor attention and contribute to investors' risk seeking behavior when purchasing mutual funds.

Original languageEnglish
Pages (from-to)5234-5254
Number of pages21
JournalManagement Science
Volume67
Issue number8
DOIs
StatePublished - Aug 2021

Bibliographical note

Publisher Copyright:
© 2020 INFORMS.

Keywords

  • Idiosyncratic volatility
  • Limited attention
  • Mutual funds
  • Salience

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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